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Should You At All Fear Weak Manufacturing? ETF Areas to Win

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The U.S. manufacturing sector has been facing a downturn, according to recent data released by the Institute for Supply Management (ISM) and S&P Global. Both reports showed that manufacturing activity in June contracted at a faster pace than in May.

While the headline might suggest a dire situation, the sub-indexes in the report reveal that respondents' most popular answers were that conditions were either the same or about right compared to the prior month.

Weak Demand and Slowing Production

The ISM PMI for June dropped to 46, indicating a contraction compared to May's 46.9. Timothy Fiore, chair of the ISM's manufacturing business survey committee, noted that demand remains weak, production is slowing due to a lack of work, and suppliers have excess capacity. Furthermore, he mentioned signs of more employment reduction actions in the near term. These factors contribute to the overall decline in manufacturing activity.

Should You at All Worry About Weak ISM Data?

While weak demand and slowing production contribute to the contraction, it is worth noting that U.S. manufacturing construction spending continues to hit record highs. An article published on Yahoo Finance delve into the issue deeper.  

Construction Spending Hits Record High

Contradicting the manufacturing downturn narrative, the Census Bureau's May report on construction spending revealed that U.S. manufacturing construction spending reached another record high. This data indicates that domestic firms are actively investing in manufacturing, particularly in chip fabs and electric vehicle plants.

Refinement in the ISM Data

The Yahoo Finance report continues to point out Wells Fargo economists Tim Quinlan and Shannon Seery have provided valuable insight into the ISM report. This suggests that the worst reading in three years largely comprises individuals who believe things are either stable or improving. The ISM index measures the difference between extremes, magnifying the perceived bleakness.

Against this backdrop, below we highlight a few ETF areas that should gain ahead.

ETF Areas n Focus

Machinery – Industrial Select Sector SPDR ETF (XLI - Free Report)

Respondents said that orders and business are steady with a healthy backlog, but potential orders seem to be getting pushed back into 2024.

Primary Metals – SPDR S&P Metals & Mining ETF (XME - Free Report)

The space has been witnessing a solid order backlog. Though pricing has stabilized, labor costs remained high, revealed the industry survey.

Transportation Equipment – iShares U.S. Transportation ETF (IYT - Free Report)

The demand has remained stable so far. Expected total end-of-year sales are likely to be flat year over year, per the industry survey.

(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)


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